A licence is a permission to do something that, without the licence, would be an infringement of the intellectual property owner’s rights. IP may be “licensed-out” or “licensed-in”. For example, you may “license-out” to another company or organisation in return for a reward, financial or other “in-kind” benefits or a combination of both. You may wish to “license-in” if you want to use another company’s IP to develop your own business and products. The terms of an IP licence are varied and depend on the relationship between the licensor and the licensee and their relative bargaining powers during negotiation.
Our team are experienced in negotiating contracts and know the key pitfalls to avoid in licences so we don’t waste time researching or playing catch-up. We help you to reach the best commercial deal for your business. As a starting point you should consider the following points:
Licence or assignment?
By an assignment, we mean a transfer of ownership of the intellectual property rights from the assignor to the assignee. By a licence, we mean a permission for the licensee to use the intellectual property rights, with the licensor retaining ownership.
If you are licensing intellectual property that is essential to achieving a technical standard you must ensure your terms are FRAND-compliant (fair, reasonable and non-discriminatory).
Licence agreements can extend to all forms of works and intellectual property including copyright, patents, know-how, trade marks, image rights, design rights or trade secrets. Bolting down your ownership of the IP before the licence agreement is signed is key.
This means knowing who owns the background IP at the start of the licence. Are any of the works jointly-owned? Often licensees request the right to modify or adapt works, particularly in technology and software code. It is important to decide which party owns the modifications and developments.
To preserve the opportunities for new revenue streams do you want to restrict use of your IP to certain products, customer bases or industries? Can the work only be used for research or not-for-profit ventures? Have you got adequate enforcement powers if something goes wrong? The remedies available under contract law often differ to those available under intellectual property law.
The licence fee/royalty structure will depend on the exclusivity of the licence, exposure to risk, product liability and support offered for the licensee. There are a variety of licence agreement models to think about:
- Some licence models work on commission based on revenue generated by the licensee. Commission-based licence fees will need a corresponding transparency right to monitor sales.
- Other licence models work on usage. Review clauses are useful to allow the licence fee to be tailored to the actual usage as the relationship develops and changes. This is especially important if you are licensing a new product.
- Flat fees or lump sums are attractive but in competitive markets the users may demand more sophistication.
- Many licence agreements come with helpdesk and technical support. The cost can be wrapped up into the licence fee or charged as a separate price point. Service level agreements are often used in connection with technical support.
- Hosting is another consideration as more software is operated on cloud platforms. A cloud computing service can be offered on a “pay-as-you-go” or “pay-per-use” cost structure.
- If your technology or product involves the use of personal data you will have data protection issues and hence costs to consider.
The relative bargaining power of the parties will often dictate pricing – but external factors such as licensing region also need to be reflected in the price.
If your product is under development you will want to keep new markets open to you and not your competitors. Do you want a sole, exclusive or non-exclusive licence? What rights will the licensee have? Can they develop the work or only use it in its current form?
Indemnities and warranties
Warranties and indemnities in your licence agreement usually come into play if someone considers that their intellectual property rights are being infringed. If you want to stop your technology or IP sold under licence being used to build competing applications, the permitted uses will need to be well documented in the licence.
Other key negotiation points
- How long is the licence for? Does it automatically renew?
- What happens if the licence terms are breached?
- Can the terms be varied, if so, how?
- Can the licence be sub-licensed or assigned? Does the head-lease termination automatically terminate the sub-licences?
- If you have multiple licences, do the exclusivity provisions conflict?
- What happens to the licence if the licensor’s ownership is sold?
- What are the repercussions of early termination, failure to pay fees/royalties and insolvency?
Until you are ready to sign, make sure your negotiations are labelled ‘subject to contract’ to reduce the risk of being bound by terms before they are finalised. If you are negotiating with a company outside the UK it is worth taking local advice, as many countries impose obligations to negotiate in good faith and you could find yourself paying damages if you walk away improperly.
Some intellectual property licences, such as patents, trademarks and registered designs may need to be registered at a relevant IPR registry. Failure to do so may mean that the transaction is ineffective against a person acquiring a conflicting interest in that IP right.
Trade mark use
If you are licensing a trade mark for a medium-long term period be aware that a trade mark can be revoked where it has not been used in the previous five years. The licence agreement itself is insufficient evidence of use – you will need evidence of turnover generated as a result of the trade mark use. Think about including a minimum use provision in the licence.
Negotiating a licence can be a minefield. Our team of experienced negotiators help you protect your interests and avoid the trip-wires that will cause problems for you later down the line.